New Metal Warehousing Regulations Halted

At the twilight hour, a United Kingdom court has ruled against changes to the London Metals Exchange (LME) warehousing rules that would have shortened the time metal could be held, impacting a hot battle that involved US regulators, aluminum producers, beverage distributors and the largest banks. The new rules were to have taken effect April 1.

Winners and losers: aluminum producers versus beverage marketers

At issue are delays in the time the metal was held in warehouse that were said to drive aluminum prices higher, an issue that led US regulators to send subpoenas to warehouse operators, including Goldman Sachs Group Inc (NYSE:GS), investigating this issue as well as tailing into investigation of commodity trading practices of the banks at large.

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The court ruling is viewed as a positive to aluminum producers such as Alcoa Inc (NYSE:AA) and Rusal, the world’s largest aluminum producer, which brought forth the legal case. Consumers of metals, such as brewer MillerCoors and Anheuser Busch Inbev SA (NYSE:BUD), which had complained to regulators and motivated the action, are viewed as the losers in the UK court ruling.  There had been lingering concerns regarding the new regulations negatively impacting market volume, said a Sterne Agee report.

“System is broken”

The warehouses would add a storage fee on top of the LME contract fee, impacting the end price for producers, some of whom used futures contracts to take delivery of the physical product.  “With the current proposal they addressed most of the things that were not working,” Michael Widmer, an analyst at Bank of America Corp. in London, was quoted as saying at the time the new rules were initially passed. “The system is broken. The LME has a physically deliverable contract that is not physically deliverable.”

Under the regulations that were struck down, warehouses with delays in making delivery of the physical product above 50 days would have been required to deliver metal every day in excess of the amount they take in by at least 1,500 metric tons.

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Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com